Compared to traditional advertising (TV, radio, print), online advertising typically costs much less. Most of my clients use some type of online advertising, with Google and Facebook advertising being the most popular. When helping clients get the best results from their marketing efforts, we discuss how their website fits into their marketing plan and how to best position their website to convert visitors into leads (and paying customers). Most marketing companies often tout the low cost of online advertising and provide statistics to prove it (including low cost per click, low cost per 1000 ad impressions, etc.). But most clients don’t understand how to calculate the true costs associated with online advertising and more importantly, they don’t know how to measure the effectiveness of their marketing campaigns. Read on to learn how to calculate the actual cost of online marketing.

Some Definitions First

Before we begin, there are several terms we must define. The first is CPM (cost per 1000 impressions) which is the cost to show your ad to 1000 potential visitors. The next is CPC (cost per click) which is the cost charged by the online advertising company for each click to the link in your ad. The click through rate (CTR) is a measurement of the percentage of people who see your ad and click on your link. A lead is a visitor to your website resulting from clicking on the link in your ad. Conversion rate (CR) is a measure of the number of leads that become new customers and buy your products or services. The final term is customer lifetime value (CLV), which is a measure of the total profits realized from a typical customer for the entire future relationship with the customer.

With the definitions out of the way, we will apply these terms into several formulas to determine the actual cost of online marketing. For this scenario, let’s assume that the CLV is $20,000. The goal of your marketing campaign is to get 12 new customers. This will bring in $240,000 in profits from these new customers.

Is your campaign making money

So, you launch an online ad campaign through Google Ads (typical CPC is $1.50 although some keywords cost $50.00 or more per click). To get your 10 new customers, you set up a marketing campaign to display your ad to 20,000 people. The total cost of the campaign is $30,000 ($1.50 x 20,000). Of the 20,000 people seeing your ad, 400 will click on the link (20,000 x 2%). Of these 400 people, 12 will become new customers (400 x 3%). The individual cost for these 12 new customers is $2,500 ($30,000 ¸ 12). With a CLV of $20,000, you are coming out ahead $17,500 per new customer. This means that your marketing campaign is paying for itself.

When calculating your actual cost of online marketing, don’t forget to include the cost of your marketing company. Without conducting this calculation, all you are getting is the cost of your marketing campaign. What you really need is discovering whether your marketing campaign is cost effective. Comparing the total cost of lead conversion to the CLV is crucial to fully understanding the actual cost of online marketing.

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